1. Field of the Invention
Embodiments of the invention relate generally to the field of auctions. Embodiments of the invention relate to the field of electronic auctions. More particularly, embodiments of the invention relate to methods, systems and data structures for conducting synthetic continuous double auctions.
2. Discussion of the Related Art
Current online and computer-implemented auction systems are automated variants of traditional auction methods. Those traditional methods will be outlined here, followed by a description of the eBay and Amazon models.
A common goal of all auction methods is to help sellers and buyers agree upon a “fair” market price for items to be sold. There is a tension between two very strong human traits in the process of determining the price at which a person is willing to buy or sell something. First, the innate selfishness of every person causes them to want to buy for as low a price as possible, or sell for the highest price possible. Second, there is an extremely strong aversion to participating in a transaction that they see as being unfair to themselves. (In mature individuals, of course, recognition of the second attribute in others tempers expression of the first.) This second attribute—an unwillingness to be cheated—is so strong that individuals will consistently choose an outcome that is worse for themselves personally, but doesn't give someone else an unfair benefit, rather than an outcome that is objectively better for themselves, but where they feel the other person has cheated them or has unfairly benefited. Interestingly, this characteristic has been demonstrated experimentally in cultures all over the world, as well as in primates—even monkeys appear to have an inbuilt sense of fairness.
“English”, Also Known as “Open Cry”, Also Known as Ascending Auctions
In a traditional “open cry” auction a human auctioneer focuses attention on a single item at a time within an auction venue, inciting potential buyers to agree to ever-higher prices until no one is willing to go higher, at which point the item is sold to the last (highest) bidder. Typically the auctioneer speaks loudly with a distinctive verbal style, the “open cry”, which can be quite difficult to understand at first, but is very efficient at conveying the progression of the bidding.
Key points of an open cry auction include: Items for sale are available for viewing and examination for some time prior to the start of the bidding process. All bidders focus on one item at a time, under direction of the auctioneer. All bidders can hear the progress of the bidding and they know what the competition is doing. Openness is the mechanism by which an open cry auction establishes the “fairness” of a price. From a buyer's perspective, the price must be at least somewhat fair, because others are bidding similar amounts.
Open cry auctions can be advantageous for the seller if a “bidding frenzy” is started, because it can cause the price to go higher than a calm evaluation would warrant. However, this can also lead to “buyer's remorse”, also known as “winner's curse” afterwards, which is a disadvantage to the buyer. Conversely, if a buyer sees there is no competition, items can sometimes be purchased for less than their value in a wider market, which is then advantageous to the buyer over the seller. These respective circumstance-driven advantages for the seller or buyer actually speak against the fairness of traditional auctions, and can lead to significant disappointment and resentment for either party.
Open cry auctions can be termed forward auctions and have the following advantages over continuous double auctions (see below for discussion of continuous double auctions): Because forward auctions address the sale of individual items, a sequence of such auctions (using the term “auction” here to refer to the sale of a single item) is effective in selling a number of non-identical items. A forward auction does not rely upon a plurality of outstanding bids and asks to establish a current market price, because the forward auction treats each item individually.
Forward auctions suffer from the following disadvantages by comparison to continuous double auctions: The forward auction is inherently unfair to buyers, because it creates an artificial temporary monopoly in favor of the item being sold—the bidders are in competition with each other for the item being sold, but the seller has no competition. Buyers may be interested in alternative items, but they can only bid on the item currently being auctioned, and do not have knowledge of how bidding will progress on subsequent auctions of the other items that they consider to be alternatives. A continuous double auction, in contrast, puts all of the (identical) alternative items up for auction at the same time. Forward auctions require buyers to examine each item being auctioned individually. This greatly slows the progress of buying and selling.
Reverse Auctions
A reverse auction is a buyer-initiated auction in which a buyer invites bids from multiple sellers. The price decreases as sellers compete for the buyer's business, with the lowest bid considered the winner. Corporations may use a reverse auction as an alternative to the more traditional RFQ (request for quotation) or RFP (request for proposal) process. There are many procedural variations in reverse auctions. For example, the buyer may not be bound to accept the lowest bid, but may accept any bid, or might not be bound to accept any bids. A reverse auction is perhaps most notable because it forces sellers to compete against each other to win the business of a buyer. Theoretically, a reverse auction is symmetric to an ascending auction, and thus can have corresponding advantages/disadvantages for buyers/sellers.
Dutch Auctions
A “true” Dutch auction is characterized by its decreasing price mechanism. The auctioneer starts by announcing a relatively high price and repeatedly decreases the price until a “bid” is announced by one of the auction participants. The auction is then terminated and the bidder wins the auction. The Dutch auction got its name from the Dutch flower auction, where flowers are sold to traders. These auctions tend to go very quickly, because the first person to bid wins. Unfortunately, the term “Dutch Auction” also refers to a completely different kind of auction, the “uniform second price” auction (see below)
Sealed Bid Auctions
In a sealed-bid auction, bidders simultaneously submit bids to the auctioneer without knowledge of the amount bid by other participants. Usually, the highest bidder (or lowest bidder in a procurement, or reverse sealed-bid auction) is declared the winner. The winner pays either the highest amount bid (a “first price” auction) or an amount equal to the next highest bid (a “second price” auction—see below). A disadvantage to sealed-bid auctions is that the auction itself does not provide information to buyers to help them determine a fair price. Additionally a bidder (e.g., the buyer) often has no way of verifying if their bid was actually the highest.
Without a verification mechanism, the auctioneer or business can sell to any bidder it favors.
Uniform Second Price Auctions (Vickrey Auctions)
“Uniform second price” auctions, also known as Vickrey Auctions, also known as Dutch auctions, are used both in the financial world and for selling multiple items of the same type. In this type of auction, sealed bids are submitted simultaneously by all buyers. If there are N such items to be sold, the N highest-priced bidders win. However, the price they pay is the amount of the highest unsuccessful bid. Thus, if there is a single item, the price paid is the second-highest price. If there are multiple items, winners may have bid a variety of prices, but they all pay the same price, equal to the highest unsuccessful bid. (There appear to be minor variants of this, e.g. all pay the same price, which is the lowest price of any winning bid.)
Vickrey auctions can actually yield both higher prices and less buyer's remorse than open-cry auctions. There is less buyer's remorse because the highest bidder never pays the price he bid—he pays what he knows at least one other person was willing to pay. The actual price may be higher than an open cry auction, because bidders bid the maximum amount the item is worth to them, as opposed to shading their bids to hide their interest from other buyers. Like other sealed auctions, the disadvantage to Vickrey auctions is that the auction mechanism itself does not provide information to buyers to assist them in determining a fair price.
Continuous Double Auctions
Stocks and commodities are traded using continuous double auctions. In a continuous double auction (CDA) the bids and the asks may be submitted and sales transacted at any time during the trading period. Offers to sell at a specific price (“asks”) are queued along with other asks at the same price. Market buy requests are matched to the first “ask” of the lowest-priced non-empty “ask” queue. Offers to buy at a specific price (“bids”) are queued along with other bids at the same price. Market sell requests are matched to the first “bid” of the highest-priced non-empty “bid” queue.
Continuous double auctions (CDAs) are at least arguably the fairest form of auction. In a continuous double auction (CDA), all potential buyers of the commodity are competing against each other for purchases, and all sellers of that commodity are competing against each other for sales. In addition, information about bid and ask prices, as well as the prices of actual trades, is typically available to both buyers and sellers, to help them determine a fair price within current circumstances. Openness, symmetry, and fairly governed competition yield a highly fluid market.
Unfortunately, continuous double auctions can only be used for commodities (identical items or quantities of identical substances), and each such commodity needs to have its own, separate, continuous double auction. So, although sellers of all types of commodities are actually in competition with each other for the money to be spent by buyers, the auction mechanism does not directly support this. Continuous double auction technology is therefore not directly applicable to items that have variations between them, even if the variations are as simple as the degree of wear on used items such as books. This is because a buyer in a continuous double auction bids without examination of the individual items or substance quantities precisely because the items or substance quantities are effectively interchangeable.
eBay Auctions
eBay ostensibly uses an electronic form of the traditional “open cry” auction, except that many such auctions are operating concurrently, and the bidding period for an item ranges from one to 10 days. Auctions “end” at a preset time, with the highest bid submitted before that moment “winning” the auction. eBay has an “automatic bidding” feature, whereby a user bids the maximum they are willing to pay, but the effective bid is only the minimum increment above the next-highest bid, and the bidder's maximum is not revealed.
In practice, only novices will place a bid more than a few seconds before an auction closes, because to do so just invites others to outbid them. This practice of last-moment bidding is called “sniping”. There are numerous software agents and web sites to help users do this, although eBay does not support it directly.
The combination of sniping and automatic bidding means that eBay's auction mechanism is actually closer to a Vickrey auction. That is, the window within which bids are visible is so short as to be non-existent from the perspective of humans taking them into account in evaluating a fair price—hence bids are effectively sealed. Because of the automatic bidding mechanism, the winner gets the item at approximately the second-highest price bid—actually at the second-highest price plus the minimum bid increment. The 1 to 10-day period leading up to the final seconds within which bids are finally submitted functions in much the same way that the viewing period prior to a live auction functions—it is provided to allow prospective bidders to view the merchandise.
Despite eBay's success, many users find aspects of their approach very frustrating. In particular, buyers must wait for days for an auction to “close” in order to purchase an item. eBay does have a “buy now” feature, but it is only available until the first bid has been placed, and the price is non-negotiable. The practice of sniping has essentially eliminated some key benefits of “open cry” auctions. In particular, prospective buyers cannot rely on the bidding process to give them any idea of what the current market price should be.
Amazon' “Buy Used” Market
Amazon's “buy used” mechanism is more like the classified ad section of a newspaper than an auction. They just list all the outstanding fixed-price offers to sell a particular type of item, e.g. a particular book or DVD title. Offers are listed in price order, lowest first. Sellers specify condition of the item; all variations are mixed together in the same list.
Heretofore, the following auction needs have not been fully met: determining a fair market price, bidding on multiple items when less than that number of items is wanted, bidding on an item subject to sale of another item, bidding on an item subject to purchase of another item and protecting against shill bidding. What is needed is a solution that preferably simultaneously addresses all of these needs.